The brewing boss who says pubs have to clean up their act to survive

Thirty-nine pubs close a week in the UK and the economy may be only crawling towards recovery, but the chief executive of pub company Marston’s thinks this is just the right time to build bigger and better outlets.

The FTSE 250 business – which runs 2,200 pubs and five breweries – raised £140m from investors last July and this year plans to open 15 large pubs around the country at a cost of £25m. Next year it plans to up this to 25 new pubs costing £55m; in total it will build 60 extra pubs over three years.

While larger rivals such as Punch Taverns and Enterprise Inns sell off hundreds of outlets due to high debt piles and the economic slowdown, Scottish-born Ralph Findlay, 49, takes a contrarian view.

He said: “We saw an opportunity. The recession had limited the growth plans of a lot of other companies in our industry and we saw a chance to push ahead.”

Findlay, in a check shirt and no tie, leans forward in his chair in the modest third-floor boardroom of the firm’s Wolverhampton city centre headquarters and explains himself.

He says: “We are in much more control than if we were to buy an existing pub, which we do also. But with these new pubs we choose the sites, we build a big kitchen, we make sure there is a garden.”

The new pubs cost around £2m each to build, and deliver a 15 per cent return on capital. Findlay adds: “The returns are better than a typical acquisition.” He says the new pubs have an average weekly take of £20,000, compared to older managed pubs in his estate that make £14,000 a week. And he adds that because the concept is tried and tested the new pubs “make £20,000 per week, from their opening week.”

Findlay, amiable and relaxed, says it has been a tough three years for the pub industry as the effects of the smoking ban, intense competition from supermarkets, health-conscious consumers and the downturn have all taken their toll.

Last year, his business, which employs 12,000, saw pre-tax profit fall 17.4 per cent to £70.3m per cent, while sales slipped 3.2 per cent to £645m. Its average profit per pub fell to £48,000 from £51,000. However, these were in line with industry forecasts.

The firm, which has a market capitalisation of £530m, is split into three operating units. Its brewing business includes brands like Pedigree, Jennings, Brakespear and Banks’s. Marston’s is the biggest manufacturer of premium cask ale in the country, with a 23 per cent market share. The company’s breweries account for 12 per cent of its profit.

Findlay says the rest of the firm’s profit is split evenly between its two remaining arms: the 500 managed pubs it runs directly, and the 1,700 tenanted pubs it operates. Its brands include the Pitcher & Piano bars.

Findlay has sold around 400 of its weaker pubs over the last three years, but now he believes he has a strong estate he can build on.

But Findlay believes that – rather than seeing new building – the pub industry will continue
to suffer a raft of closures.

He says: “There are around 55,000 pubs in the UK, and most commentators agree that we are overpubed.”

The working man’s spit-and-sawdust pub that only offers a pickled egg by way of food is undoubtedly in terminal decline, most analysts agree. Findlay himself predicts that a further 10,000 pubs will close over the next five years, and he does not see that as cause for concern.

He says: “In general that will be good, because the image of the pub will change for the better in the public mind and will be less associated with dingy outlets.”

Perhaps the most radical thing to hit the industry over the last decade was not the July 2007 smoking ban, but the longer-term growth of food served in pubs. Findlay makes the case that food served in pubs leads to a number of other Fs that change the nature of how a pub works. He says: “Food brings in families, females, and the over forties and fifties. They demand a better kept pub, and outdoor area, and a more welcoming atmosphere.”

In 2000 food was 17 per cent of Marston’s sales; in 2004 it had moved to 24 per cent; and Findlay says by the end of this year food will account for 40 per cent of sales. He adds that in his new build pubs food account for 60 per cent of sales. The average spend on the food menu across the group, which ranges from mushroom risotto to a Sunday roast, is £6.

Findlay adds that around five years ago Marston’s “was behind that consumer trend. Now we are at the top end of the players out there.”

Marston’s changed its name from Wolverhampton and Dudley Breweries in 2007 to reflect the national scale of its business. Findlay stepped up from finance director to chief executive in 2001, and over that time he has added breweries and pubs so that the firm is no longer considered a natural bid target that is too small to survive on its own.

The group welcomed the Office of Fair Trading assessment in October 2009, which found that the tied relationship between pub companies and tenanted landlords was not unfair.

Small landlords and consumer groups, like the Campaign for Real Ale, say tied pubs have to take beer from a pub company at higher prices that are then passed onto the customer. If the landlord switches to a freehouse model, which means he is free to choose beer from any supplier he wishes, the pub company who owns the building will then hike the rent to make up for lost trade.

A Business, Innovation and Skills Committee report in February said that wages in the pub industry were severely depressed. The Committee found 67 per cent of the lessees who responded to a survey it drew up earned less than £15,000 a year.

Not surprisingly Findlay defends the tie. He says: “There is not a problem with the tie itself. The operation of the tie needs to be carefully looked at.”

Marston’s average annual rent is £25,500 a year, which it describes as “competitive.” And Findlay adds that the average salary of its landlords is between £30,000 and £40,000. He says a key role of the firm is to help as many of its tenants through the downturn as possible.

But Findlay does not see an end anytime soon for the pain that pubs and many other retailers find themselves in.

He says: “This year and 2011 are going to continue to be tough.”

The pub company boss adds: “We are a cash business. The amount of people who pay by credit in are pubs is miniscule. So it is about how much cash people have left in their pockets once they have paid their bills. That means you have to offer value for money. You have to be sharp when it comes to your promotions.”

Findlay is betting that in the short term innovative discounting will get him through the downturn, and in the medium-term his range of new pubs will help him grab a rising share of a beleaguered market. His shareholders will certainly be hoping that he is right.

Age: 49

Work: Qualified as an accountant at PricewaterhouseCoopers in 1988; joined Bass as treasury manager in 1990; moved to food group Geest in 1992 as financial controller; joined Marston’s in 1994, became finance director in 1996 and chief executive in 2001

Education: Edinburgh University, where he read Geology

Lives: Wolverhampton

Family: Married with two children

Hobbies: A season ticket holder at Nottingham Forest. He also runs, skis and plays the guitar